How to Prepare your Portfolio for the Unknown


Unless you’ve been living under a rock since New Year’s Day, you should be well aware of the

tumultuous events that have been taking place around the world – the disaster in Japan and the

uproar in the Middle East and North Africa are just a few global measures that are causing

economic changes around the globe. We’ve seen gas prices soar and a rise in food and beverage

commodities, but the place in which these changes are especially apparent is the stock market.

Inflation has caused investors to shift their assets and determine which of the world’s financial

markets are being hit the hardest with higher interest rates and a rise in inflation. If you have any

game pieces playing in the stock market you’ll surely want to know which markets are being

affected by the ever-changing economic fundamentals. Let’s discuss the possible risks that your

portfolio faces, and aim to strengthen any weak spots.First off, let’s discuss the risks you must

consider – inflation and interest rates. These are two of the biggest factors to put into perspective

when considering stock market choices. Currently, higher energy and commodity costs are

sticking it to both consumers and producers. However, the big question that investors need to

mull over is how much of these high prices are due to speculation. Instead of looking at

speculations in the stock market, it’s crucial to consider supply and demand realties, and how

they will subsequently affect inflation, and in turn interest rates. Possible solutions to market

volatility and the risk of rising inflation and interest rates starts with broadly and efficiently

diversifying your portfolio. Here are some suggestions of market choices to invest in during this

time: U.S. and international stocks, commodities, inflation-protected bonds, real-estate

investment trusts and cash, all of which have the ability to withstand inflationary bouts.

Next, let’s discuss the risks you must anticipate – war, disasters, political and economical

upheaval and social unrest. While the stock market is extraordinarily resilient, and has been

fighting against all the shocks in 2011 so far with great momentum, it’s hard to say whether it

will continue to stand firm against the current troubles in the Middle East and Japan that are

disrupting the technology, automobile, and oil industry. Possible suggestions for anticipating

these risks include adding gold and other precious metals to your portfolio, as well as

implementing hedge-fund-like long-short strategies, which attempt to generate stock-market

returns, but with lower risk. Essentially, you bet that some investments will rise while others

will fall.

Of course, we must discuss the risks that never go away – markets and companies. Yes, market

risk is inescapable, but don’t view your portfolio like betting at a horse race – because the

favored winner may inevitably lose horribly. The key to market strategy is diversification and

implementing a safety margin. Keep these three risks that all investors should understand in

mind: valuation risk – overpaying for an asset, fundamental risk – buying something that turns out

to be flawed, and financing risk – using leverage. Other suggestions include avoiding

concentration in similar stocks and mutual funds, as well as never overlapping markets or

sectors.

Finally, a risk you must fear is that of playing it too safe. It’s a difficult balance to find – risk it

all and you could end up with too many losses, risk too little and you could be in danger of not

having enough money in later years, and of missing major market advances. Any suggestions

for not playing it safe simply revolve around going around your judgments and taking small risks

that yield small returns. Hopefully then you’ll start to feel more confident in your investing

strategy. Unless you can predict the future, it’s crucial to embark on a strategy that will preserve

capital in a period of heightened volatility. Simple steps like assessing risk, identifying

opportunities and looking past the present and into the future can shed light on how to handle the

markets twists and turns. And even though the future of the stock market can never be certain, at

least you can equip your portfolio with a nice safety net.


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